A Theory of Self-Enforcing Indefinite Agreements
One of the core principles of contract law is the requirement of definiteness. Conventional wisdom holds, however, that the indefiniteness doctrine is largely ignored by courts. In this Article, Professor Scott examines the contemporary case law on indefinite contracts and his review yields three striking findings. First, there is a surprisingly high volume of litigation. Second, the indefiniteness doctrine lives on in the common law of contracts. Third, a large number of the indefiniteness cases involve contracts that are "deliberately" incomplete-that is, parties have declined to condition performance on available, verifiable measures that could be specified in the contract at relatively low cost. These findings raise a fundamental question: Why do parties write deliberately incomplete agreements in the shadow of a robust indefiniteness doctrine? One answer is that these agreements may be self-enforcing. But most of the recently litigated cases involve contracts that do not appear to be self-enforcing in the traditional sense. A second answer is indicated by recent work in experimental economics, which suggests that roughly half the population behave as if reciprocity were an important motivation, while the other half react as if motivated entirely by self-interest. This evidence of a taste for "reciprocal fairness" in nearly half the population, argues Professor Scott, may expand the domain of self-enforcing contracts beyond what is conventionally understood. It may also support a theory that predicts that deliberately incomplete contracts that rely on self-enforcement through reciprocal fairness between strangers are more efficient than the alternative of more complete, legally enforceable agreements.
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- January 21, 2016